Monday, August 20, 2012

The first day of class is right around the corner for many college freshmen. College can be both an exciting and stressful time financially. You’re away from home and mostly on your own when it comes to finances.

This week we’ll blog about some of the things you need to know as you head out on your own financially.

Today, we start with what you need to know about student loans.

Two Types of Loans – Federal and Private

There are two types of loans – federal and private.

It is generally a good idea to exhaust federally guaranteed loans, before seeking private student loans.

Federal Loans

The federal government sets the maximum interest rates on federally guaranteed loans.

The U.S. Department of Education has two federal student loan programs:

1) The William D. Ford Federal Direct Loan (Direct Loan) Program is the largest federal student loan program. Under this program, the U.S. Department of Education is your lender.

2) The Federal Perkins Loan Program is a school-based loan program for undergraduates and graduate students with exceptional financial need. Under this program, the school is lender.

Private or alternative loans have terms set by the individual lender, not the government, and the rates are based on a borrower's credit history. These loans are generally more expensive than federal loans and include fees.

If you decide to take out a private loan, make sure you understand who is making the loan and the terms and conditions of the loan.

Private Student Loan Shopping Tips

1) Look for a loan with a relatively low interest rate and low fees. A creditworthy cosigner will help lower the rate a student is charged.

2) Be careful when comparing loans with different repayment terms according to the annual percentage rate (APR). A longer loan term reduces the APR despite increasing the total amount of interest paid. Also note that it is not uncommon for lenders to advertise a lower rate for the in-school and grace period, with a higher rate in effect when the loan enters repayment. Online financial calculators are important tools to use to generate meaningful comparisons of different loan programs.

3) Federal law gives you the right to pick the lender of your choice. Some schools have "preferred lender" lists, but these lenders are merely a recommendation and students and their parents remain free to pick their own lender.

4) Read all documents carefully before signing! This is true of any contract or document you sign. Before you sign, make sure the loan agreement matches any advertised rates the lender promised. If it differs, ask the lender about the difference BEFORE you sign.

5) Keep copies of all paperwork. This is important because often payments on student loans begin after students graduate from school, and this can be several years away. If you keep all of your loan documents, you will know exactly what the terms of your loan are and you can ensure the lender complies with those terms.